Marchex Inc (MCHX) 2016 Q2 法說會逐字稿

Good afternoon. My name is Nicole and I will be your conference operator today. At this time I would like to welcome everyone to the Marchex second-quarter conference call.

(Operator Instructions)

Ethan Caldwell, you may begin your conference.

Good afternoon, everyone, and welcome to Marchex's business update and second-quarter 2016 conference call. Joining us today are Peter Christothoulou, Michael Arends and Gary Nafus.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, including with respect to our financial and operational performance. And actual results may differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause these results to differ materially are set forth in today's earnings press release and in our most recent annual and quarterly report filed with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements for subsequent events.

During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release is available on the investor relations section of our website at marchex.com.

At this time I'd like to turn call over to Pete Christothoulou.

Thanks, Ethan, and thank you, everyone, for joining us for our second-quarter conference call.

Let me start by saying that we are disappointed with our Q2 financial results and revised 2016 outlook, which were driven by a combination of factors. Most significantly, a small number of large clients made adjustments to their marketing budgets, changes which unfortunately reduced what they will likely spend on our Call Marketplace this year.

These changes affected us in Q2 and also limited the growth we expected in the second half of the year. This is the principal reason for our revised 2016 outlook. We have historically relied on a small number of large multi-million dollar clients to generate a significant portion of our revenue. As a result, we're susceptible to marketing budget fluctuations from a handful of clients which is what impacted our Call Marketplace.

Another contributing factor to our results is that two of these large clients were recently acquired. They remain significant customers, especially of our analytics products. And although they have new owners, we worked closely with both of them for more than three years and believe we will continue developing our relationships with them. So that's the bad news.

Now, we're dissatisfied with the short-term setback, it does not impact our belief in the online to offline opportunity we have in front of us. Or our confidence in our ability to help the world's largest brands solve the challenge of connecting and measuring the interaction between the physical and digital worlds.

In fact, when I look at the three strategic initiatives we laid out at the start of this year, I can confidently say that we have made progress on all fronts. Specifically, we said that during 2016 we would increase enterprise client growth, develop global strategic partnerships and accelerate our product innovation.

We are seeing early signs that our sales and product investments are paying off. For example, in the first half of the year our estimated new customer bookings has grown more than 50% from the fourth-quarter 2015 run rate.

Additionally, we have integrated more than 40 mobile publishers into our display analytics product. We're eager to ensure these and other leading indicators translate into further customer adoption and are ultimately reflected in our P&L.

Connecting the physical and digital worlds is one the largest marketing technology opportunities. We know this because we hear it constantly from leading global brands across our top categories.

Their two main issues are cross-channel attribution and connecting offline and online events into one complete picture. Consumers are spending more time than ever on their phones. It's second nature to research on a mobile device and then interact with a business offline, either over the phone or in a store.

In fact, consumers in the US alone are expected to make more than 169 billion calls to businesses from smart phones by 2020, nearly double today's volume. Phones are now a vital extension of us. We make purchases from these devices 24 hours a day. With US mobile ad spend projected to grow nearly three times to $62 billion by 2019, we believe these digitally influenced offline interactions will only grow.

Yet marketers lack visibility into which mobile ads drive consumers to make purchases offline. They struggle to understand how to drive more transactions, improve ROI and enhance the mobile consumer experience. They recognize that online desktop-centric methodologies apply to mobile use cases simply don't work.

This is why our focus is squarely on building powerful analytics tools that allow enterprise marketers to deeply understand the online to offline path to purchase. Our assets, expertise and scale uniquely position us to solve this problem and we're seeing greater engagement in client and prospect conversations as a result.

For example, let me highlight specific progress in our three strategic initiatives. One, enterprise client growth: investing in sales and marketing is a core part of our strategy to increase market share. At mid year we expected to have more fully-ramped sales representatives, but this effort is taking longer than we anticipated and our fully-ramped headcount is lower than planned.

Despite this, we have made substantial progress in building the pipeline this year. And we have increased our penetration of leading global brands in the verticals we are targeting. For instance, in the travel vertical we now work with four of the largest global hotel brands.

Three of these clients were signed in the first half of 2016 and we expect to add more top-10 clients this year. These clients represent the biggest brands in the business and even though they aren't meaningful financial contributors, we're proud to call them our clients and confident that they'll be part of the next set of large brands that power our future growth.

Our travel vertical wins aren't limited to just hotels. Marchex now works with four of the largest cruise brands in the world, two of whom were signed in 2016. In the communications vertical we now work with six of the largest US brands, including Verizon, T-Mobile, DirecTV and Charter Communications. In financial services we have expanding relationships with insurance companies like State Farm and Travelers Insurance.

Taken together, our new client opportunities have grown by more than 25% since the beginning of the year. Our estimated annual new client bookings has grown by more than 50% from our fourth-quarter 2015 run rate, which speaks to the value we provide. We expect our new client pipeline to continue to scale as we fully ramp our enterprise sales force.

Two, global strategic partnerships: in the first half of the year we expanded strategic integrations with three leading technology partners, including Salesforce, Google's DoubleClick and most recently, Adobe's Marketing Cloud. Adobe has integrated our search analytics product into their offering to make it easier for our clients to leverage data and insights directly within their existing workflows.

Additionally, we've integrated more than 40 of the world's leading mobile publishers, including more than half of comScore's top digital media properties into our display analytics product. This is up from three integrations at the start of the year. These new integrations allow us to highlight which publishers and which display campaigns ultimately lead to a call conversion.

Three, accelerated product innovation: leading brands are working with Marchex because we're providing unique value. In fact, our omni-channel analytics product road map will be the first to holistically measure the online to offline mobile caller customer journey, from lead generation through to conversion. In the second quarter we announced major enhancements to proprietary call DNA feature, including transcription technology, as well as security enhancements.

We're also scheduled to launch Display Analytics in the near term. This product allows clients to measure the effectiveness of display media and ultimately driving call conversions. Importantly, we're finding that display advertising is part of the consumer path to purchase and marketers have misunderstood its impact on conversions.

With Display launched, we will also measure the consumer journey and interplay between display and search marketing tactics. By entering the display market with an analytics product, we're expanding our ability to measure the effectiveness of brand advertising and bring visibility and accountability to this digital channel. With the total addressable market equal to search, we're positioning Marchex to become a leading mobile advertising analytics Company that solves the omni-channel attribution problem.

Our goals this year were ambitious. Nobody here is satisfied with where we are today. I hope you can see why, despite our second-quarter financial results and outlook, the team and I are confident about what lies ahead. We have a collective urgency to overcome our short-term disruptions and translate progress from the first half of 2016 into stronger future financial results and ultimately category leadership and the creation of a great Company.

With that, I'll hand the call to Mike for more details on our financial results. Then he and I will be happy take any questions you may have.

Thanks, Pete. For the second quarter, call-driven revenues were $34.4 million. We know some investors track our growth without YP so to help their models with this framework in mind, call-driven revenue in the second quarter, excluding YP, were $26.3 million compared to $24.1 million in the year-ago period.

In the second quarter we saw the benefits of expanding existing enterprise client relationships in key focus verticals such as financial services and communications, which positively impacted growth on a year-over-year basis. On a sequential basis, our growth rate was primarily influenced by the financial services vertical, a category that is disproportionately weighted to the first quarter versus other periods.

Additionally, looking at our strategic initiatives, we continue to build our sales team and feel good about the quality of the team we're billing to support our long-term growth initiatives. We are just half a year into our new sales approach and expect our initiatives to take time to ramp. We are pleased with the quality and experience of our new sales team and they have been successful at adding new clients early in their tenure.

Furthermore the pipeline also continues to quickly build. While we believe these new relationships and an expanded pipeline will ultimately have a meaningful impact on our long-term growth, they are not yet at a scale that is impacting our profile. Over time we expect the investment in our sales initiatives and our continued product momentum to support a larger, faster-growing business.

Looking further down the P&L for the second quarter. Excluding stock-based compensation and acquisition and disposition-related costs, total operating costs for the second quarter were $36 million. Sales and marketing was $5.1 million, which was up year over year as we continue to invest in our sales organization.

As we had previously communicated, this is an area where we have an increased investment in 2016, as we are expanding our sales and channel footprint to accommodate new growth initiatives and support a growing product portfolio. Product development was $6.9 million, flat quarter over quarter.

Moving to adjusted operating income before amortization and EBITDA for the second quarter, call-driven adjusted OIBA and EBITDA were a loss of $1.6 million and $800,000, respectively; GAAP net loss from continuing operations was $68.8 million for the second quarter of 2016, or $1.65 per diluted share, which includes the effect of an estimated pretax $63.3 million, or $1.52 per diluted share; non-cash impairment charge based on the preliminary results of the Company's goodwill impairment tests. This compares to GAAP net loss from continuing operations of $1.3 million, or $0.03 per diluted share for the same period of 2015.

Adjust non-GAAP loss per share, an estimated some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.02 per share, compared to income of $0.,02 per share for the same period in 2015. We ended the second quarter with more than $105 million in cash on hand.

Now turning to our outlook for the third-quarter and full-year 2016, first, let's discuss revenue. We are evolving our annual guidance to include total call-driven revenue. This figure includes our expected contribution of YP.

Our reasons for the new approach are due largely to a few factors. One, we have increased visibility in the outlook from YP for this year and, two, we are discussing a longer-term extension of the relationship. With these factors in mind, today we are releasing annual call-driven revenue guidance of $128 million or more.

For the third-quarter we expect call-driven revenue of $30 million or more. This revenue guidance is based on the following trends: first, with respect to YP, as I mentioned earlier, we're discussing a long-term renewal which has increased our visibility for the remainder of the year. Regarding our enterprise revenue streams, as Pete mentioned, clients' budgets can change and we may experience period-to-period variability based on a variety of factors.

Most notably we've had changes in the 2016 outlook from a small number of clients relative to prior expectations. As a result, we're revising our expectations for growth in the back half of the year. We've seen some budget allocations shift as well as some overall cuts to total second-half budgets of ad dollars from large advertisers.

Two of our larger clients, for example, were recently acquired, one, in the home services vertical, and another in the communications vertical, whose new parent companies had prioritized media initiatives in favored combined company branding for the balance of 2016. We expect them to be several million dollars lower this year than originally anticipated. This is something we are actively working to address through our client development and sales initiatives, though that may take some time.

I'd note that all customers are remaining with us, including leveraging many of our products and each is remaining a seven-figure customer this year. Furthermore, despite the revised outlooks, we believe there is a path for long-term growth with each. Earlier this year we reorganized the sales leadership structure and have built momentum within our sales organization to support our expanding product portfolio.

Our investment has led to early wins with global brands. Our new customer wins will now contribute meaningfully to the near-term financial picture, show that we are building our long-term pipeline. We believe we have significant untapped opportunity in our core verticals and expect that new customer momentum to continue as our new sales hires ramp.

As Pete noted, this will take time but we believe our long-term growth profile outlook continues to improve as a result of our sales investments. Additionally, as we launch new products we believe we are developing the path for multiple integrations and raising the prospects of a faster ramp window over the long term.

Next, looking at call-driven adjusted OIBA and EBITDA. For the third-quarter we are forecasting call-driven adjusted OIBA at a range of a loss of $2 million to a loss of $4 million. For call-driven adjusted EBITDA we are forecasting a range of loss of $1 million to a loss of $3 million for the third quarter.

Our guidance takes into consideration our updated revenue outlook and our previously announced investment in sales and marketing and related investments. It's important we align our cost structure with our current revenue levels to ensure that our future growth drives greater efficiency and operating leverage, and we are looking at opportunities to do that quickly. Additionally, as we gain customer traction from sales and marketing initiatives and grow our enterprise base, we believe we will see flow-through to contribution that results in financial leverage over time.

I'd like to thank all of our employees for their hard work. Thank you for joining us today. And we look forward to reporting on our progress as we move forward. I'll hand the call back to the operator to take questions.

(Operator Instructions)

Ross Sandler.

Hi, this is [Aki Frood] dialing in for Ross. Thanks for taking our question. Two high-level questions for Pete and then one for Mike. First thing, there's been a big uptick in the analytics around tracking online to offline in shoppers, especially with something like Google and Facebook using mobile. When do you think this kind of visibility starts to move the needle on click-to-call spending allocations? That's number one.

And then number two would be regarding ad blockers, there's been a lot of chatter in the last few months. How are ad blockers impacting your business? Are they cutting you display ads that drive click to call? Or they just moving ad budgets altogether? How does that work? If you can give us some updates there? Thanks.

Sure. I'll answer in reverse order. The first is on ad blockers. We're not really seeing any impact from ad blockers. That tends to have to do more with display and viewability. And our products, particularly as you think about calls, are really directly attributed to direct response mechanisms today. So ad blockers and viewability aren't really a part of what we're experiencing.

As it relates to visibility and analytics, we're in the very early stages of what we think is a tremendous market when you talk about online to offline. We believe that because the customers that we're talking to across all of our core categories, many which are some of the leading global brands in the world, have these specific problems of connecting mobile ads to these offline interactions, whether you're clicking the caller walking into a store. And they're really thinking about how do they tie together a complete picture that gives them a clear understanding of what's happening in each channel and how each media channel impacts openly an offline conversion.

When you think about how that translates to visibility, we really are looking at the progress we have with existing clients within our analytics products and our sales progress in new sales and the metrics that we're seeing in terms of driving new pipeline development. That tells us that we'll continue to have increasing analytics visibility as we look out over the next couple years. So we think that we're in the early stages of the market and we're seeing good penetration as it relates to new client development for analytics product, specifically.

Okay, great. And then one question for Mike.

Mike, I was wondering if you could talk about how the pricing and the unit economics work when you introduce all these new products to core DNA?

It's a very good question. When we think about the benefits being provided to the customer, we're focused on customer value. Very much the value is attributable to the phone calls or the actions that the consumer is taking. The goal for us is to align the pricing specifically with the value that we're providing to the advertiser.

So in this case, if it's on a pay-for-call basis that is the specifics of the incremental charge that we would be providing to the customer. So for the call DNA premium, it is based on a unit transactional basis or pay-for-call basis.

Okay. Great. Thank you.

Gene Munster.

Good afternoon. For Pete or Mike.

If you look at the YP business in the back half of the year, Mike, you mentioned that was part of the guidance. Is that basically and add-back from previous guidance? And if so, how much is that add-back?

And then second question for Pete is on the sales team goals. You said it would take some time. Is that time through the end of this year or beginning of next year? And then will this increased investment phase continue into next year? And last question is you have $105 million in cash and you have the same investment in the products, is that the best way to think about use of cash, investments and products? Thanks.

Hi, Gene, this is Mike.

I'll take the first part of the question related to YP. I think from a guidance perspective, what we did is we updated the model to include both the enterprise revenue streams and the YP revenue streams for the annual period. And part the reason we did that was because we are having discussions about extending the relationship with YP into 2017 and potentially beyond.

And as part of that, we've been able to get better visibility and a higher level of comfort over the remainder of 2016. So we included YP as part of the overall updated annual forecast that we put in there. The enterprise amounts are included, as well.

We also believe for both of those particular streams, we do have a range of possible outcomes. How we built the updated forecast that we put out today, we believe that it is the lower part of the range that the numbers reflect today. We'll see how it plays out.

Hey, Gene, this is Pete.

I'll answer the cash question then I'll turn it over to Gary to answer the sales question. Regarding the $106 million on the balance sheet, I'd say that we're obviously comfortable with that cash position. We like the flexibly it brings us.

We're heads down on investing in our business and building the right products for our clients. We think we have a very good handle on what that is based on feedback directly from our clients.

To the extent we see something that accelerates our position, drives higher market share with our clients, we'll certainly take a look that. But right now there's nothing on the table.

Hi, Gene, this is Gary. Just to talk about the sales ramp. We have been rebuilding the sales force. That has been a continuous process since January. And so we've hired continually month by month through the year and expect the ramp to take some time, as we are hiring in a tight labor market, as well as need to bring folks up to speed on our products and value propositions.

Okay. Would it be safe to say that as we think about the investment that you've made in 2016 that equal amount investment will be in 2017? Or is this a more robust investment year?

Gene, this is Mike again. I do think this is a more robust investment year. And I also think with our updated profile and outlook, we are looking at different ways to find efficiencies. We're working on those quickly and in the relatively near term.

Okay. Great. Thank you.

Brett Huff.

Good afternoon and thanks for taking my call.

Quick question on the budget. I think you talked about the revenue issue that you are seeing in two different buckets. Bucket number one is a couple of clients that got bought and it sounds like there's some budget things going on there.

But then also there's some other clients that didn't get bought, it just sounds like they either shifted their budget into something, another marketing, or it got cut. Can you give us a sense of what their shifting to if you have that insight? And what the rationale is for cutting in the non-purchased large clients?

Sure, Brett, this is Pete. The first thing is, I'll just reiterate, this is a small number of clients that are primarily focused on our Marketplace. As you highlighted, two of them were acquired and are going through the process and evolving their own media tactics, and as a result, have slowed down materially to focus on some of the combined company initiatives that they have. Both of which, as we said, we remain close with and they still are live and operating and they've integrated several of our other products, including analytics.

The others, I would attribute to back half of the year planning and internal business initiatives and priority adjustments from those clients. In a couple cases there's some reduced budgets predominantly, as well as revising media tactics generally for the back half of the year based on their own internal priorities. It's really, I think, as much as we know we can communicate. Again, we have good relationships with all of them. We continue to find opportunities to integrate other analytics products and they remain close relationships of ours.

Great. That's hopeful. In terms of -- Mike -- an opportunity for cost cuts, can you give us a flavor what those might be? I know you are probably going through the process of determining those now, but it is it real estate? Is it that kind of thing? Any high level color on that?

I think it's really too early to say at this point. It could be some minor efficiencies that we look to. We do think there's variability in some of the forecasts that we put out today and I'll reiterate that we do think that those forecasts are the lower end of the range. We'll see how it plays out. But we are planning on taking some initiatives and looking at things in the relatively near term.

Those the two questions I had. Thanks for your help.

(Operator Instructions)

Darren Aftahi.

Hello. This is Nolan on for Darren. Thanks for taking my questions. First, how is the YPT relationship going? Are you seeing any traction with new accounts in the quarter? And second, what verticals are you seeing over indexed growth?

Nolan, this is Mike. Let me take the first part of that question and, Pete, maybe you can dovetail on with the verticals. In terms of YP, there's a couple things were seeing. From discussions and extending the relationship, we think that there's an opportunity for account volumes based on certain initiatives that potentially stabilize as we move into the 2017 period.

At this point in time we still think there's going to be a sequential decline in the YP revenues in the next quarter of this year, and we'll see how that plays out. We don't have a lot more information to provide at this time.

And regarding the traction in the verticals, we mentioned a couple on our call today, particularly travel where we're now working with many of the world's largest brands in the hotel category, as well as predominantly all the top cruise lines. That's a very strong category for us, and we think one that will be a big driver in the future.

Other categories that we're seeing good traction include communications. For example, Vonage is a recent customer addition. And auto we're very excited about as well, particularly with the new client development we see there. Those are the three that we're really focused on right now.

(Operator Instructions)

There are no further questions at this time.

Thank you, everyone, for joining us today. We're excited to keep pushing forward here. We feel good about our business and look forward to updating you in the coming quarter on our progress. Thank you.

That does conclude stay conference. You may now disconnect.